Why Are Gas Prices So High in California? Part I

Gas is cheap these days. Since 2014, the average price of a gallon of gas in the US has been cut in half to $1.70 and is headed still lower.

Except in California. A gallon of gas is $2.42 on average here. That’s more than 70 cents above the US average.

People in California are so used to paying more that this is seen as good news. Gas prices topped $4 in Los Angeles in the summer of 2015. So Californians are celebrating, not realizing that they are still paying more than the rest of the country.

Expensive is now normal in California. In 2015, a gallon of gas sold at the pump cost 70 cents above the U.S. average, according to the California Energy Commission. And for the month of January 2016, gas prices were 80.1 cents above the national average. That’s huge.

A difference of 70 cents may not sound like much, but multiply that by the 14.9 billion gallons of gasoline consumed in 2015 by drivers in the nation’s most populous state.

The number gets a lot bigger.

California drivers paid a whopping $10.4 billion more for gasoline in 2015 than the US average. Wow.

Why is this so? The reason frequently given is the state’s higher taxes and strict environmental regulations drive gas prices higher.

California requires the world’s cleanest burning gasoline, which is more expensive to refine. Cost: 10-15 cents more per gallon.

So taking the low and high of these estimates (which like most of the information used in this post come testimony before a state panel) we get either 10+10+10 or 30 cents or at the high end, 15+15+15 or 45 cents. That accounts for less than half to two-thirds of the 70 cent-per-gallon difference between the average U.S. gas price and California’s.

Simply put, there isn’t enough gas supply to meet demand, especially in Southern California where most of the state’s population lives. That drives the average price of a gallon of gas higher.

In a properly functioning market economy, scarcity of gasoline, a widely available commodity, should serve as a signal to competitors. There’s money to be made selling gas in California! Competitors arrive with gas to sell. The supply increases until prices gradually fall back to normal.

The reason why is a bit surprising: A lot of it has to do with geography.

In old 16th and 17th European maps California was depicted as an island. In terms of gasoline, California is an island.

Almost all of California’s gasoline supply is produced inside the state by 13 refineries. And this put the state’s drivers at a major competitive disadvantage.

When everything is working smoothly, these refineries can supply enough gas to meet demand. In fact, California exports gasoline to Nevada and Arizona.

However, things don’t always work smoothly. Refineries break down or catch fire and the sudden shortage can cause prices to shoot up.

Gas prices have remained persistently high in Southern California since an explosion shut down Exxon Mobil’s Torrance refinery in 2015. The Torrance refinery produced somewhere around 10 percent of the state’s gasoline supply.

An explosion at an Exxon Mobil refinery in Torrance in February 2015 has resulted in higher prices in Southern California. (Courtesy LA Times).

Outside California, when refineries hut down for routine maintenance or unplanned outages, drivers often don’t even realize it. Other refineries quickly make up the difference.

Take Florida. While California produces all its own gasoline, Florida is the opposite extreme. Florida has zero refineries. It is totally dependent on imported gas. So what does gas cost there? $1.75, a few pennies the national average.

Like most of the country, Florida gets its gasoline via pipeline from the Gulf region. The U.S. Gulf region is a giant gas exporting machine. Texas and Louisiana together account for half of the gasoline refining capacity for all of the United States.

Pipelines can move gas from Texas as far away as New York, but they don’t reach California. (Exactly why this is so is unclear, since a Gulf pipeline could reach Los Angeles through Arizona and New Mexico.)

Pipelines do link California to Nevada and Arizona, but the gas flows only in one direction: out of the state. Gas flows from the Bay Area to Northern Nevada and from Southern California to Las Vegas and Arizona.

If you look at the chart below, you’ll see that the arrows all point east. Also note there are no pipelines linking Northern and Southern California. This is another big problem.

Well, can’t ships bring gas to California to alleviate shortages? Why not ship gas from the Gulf to California in times of shortage?

California’s geography works against it. Outside California, there are only a few refineries in the world that produce gas known as CARB that meets the state’s strict standards. They are all far away.

The closest refinery that produces CARB gas is in the Gulf. It takes 10 days for a tanker from the Gulf to pass through the Panama Canal and reach California.

Due to a quirk of US law, it’s actually more expensive to ship gas to California from the Gulf than from refineries in Asia, even though the voyage from Asia is twice as long. It costs $10 per barrel to ship gas from the Gulf Coast to Los Angeles vs 6 a barrel from Asia.

Under a law known as the Jones Act, ships that sail from one U.S. port to another must be made in the USA and at least 75 percent of the crew has to be American citizens. There are very few Jones Act ships left.

It’s so hard to find a Jones Act ship that gas cannot easily move around even inside California. As noted earlier, there are no gasoline pipelines linking Northern California with Southern California.

At a hearing this month before the Petroleum Advisory Market Committee, an industry analyst noted that gas was 30 cents cheaper recently in Northern California than Southern California. But there was no way to move the gas south.

Few ships and no pipelines mean California’s gas market is isolated from the rest of the country. And this is the real reason why gas is much more expensive in California than the rest of the country.

We here in the Golden State are totally dependent on in-state refineries.

That doesn’t sit well with some people.

This concentration of power has given rise to charges that refiners are using market power to drive prices — and their profits — higher. We’ll take a look at this in our next post.